What does the downgrading of China’s credit rating mean?

10 Apr

For the first time since 1999, China’s sovereign credit rating has been cut by a major international agency. On Tuesday, Fitch downgraded the nation’s long-term local currency rating from AA- to A+, citing the downgrade as a reflection of an increased concern over China’s financial stability.

Fitch’s trepidation centres on a number of “underlying structural weaknesses” in the Chinese economy, primarily based upon a rapid expansion of credit since 2009, when state-owned banks unleashed a surge of loans to counter the global financial crisis. Some analysts believe that, although the government’s tranche of credit kept Chinese growth on track, the influx of credit led to bubbly housing prices and saddled local government with large loans.

Between 2009 and 2012, China experienced the second-fastest expansion of credit in real terms (behind Qatar) and it seems the rating agency harbours strong concerns over the country’s reliance upon credit. The agency warned that total credit in China may have reached 198% of GDP by the end of 2012, up from 125% in 2008. Andrew Colquhoun, head of Asia sovereign ratings at Fitch said, “Ultimately we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet. We don’t yet know what form this will take – central bailouts of local governments or of banks, perhaps.”

The rating agency also stated that the growing amount of non-state credit within the economy, known as “shadow banking”, is a cause of risk from a financial stability perspective. Such credit ranges from corporate bonds to trust loans and dampens the effect of the government’s credit controls. Only 55% of new social financing took the form of bank lending in the 12 months to February 2013, down from 76% in 2009.

Some analysts have argued strongly against Fitch’s downgrade. Rival agencies Moody’s and Standard & Poor’s have both left their ratings unchanged since their upgraded views in late 2010. In explaining the downgrade, Fitch also cited concerns of China’s “less favourable record on inflation management” that it’s A-rated peers, despite data showing a sharp drop in the rate of inflation in China for March 2013.

Do you agree with Fitch’s contention that China’s growing reliance upon credit is a cause for concern?







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